FX Daily: Can the ECB break the euro’s low-volatility torpor?
The desk anticipates that the European Central Bank (ECB) will maintain its interest rates during today's meeting, focusing on supporting a hawkish sentiment in market pricing. This cautious positioning might provide support for the euro, delaying any significant declines against the dollar. Per the full note from ing, ongoing hawkish sentiment among global central banks is limiting the upside for the dollar, even as commodity currencies like the Australian dollar gain traction from positive employment figures. The ECB’s aim to signal a potential rate hike in September could reinforce this outlook, maintaining upward pressure on EUR/USD in the near term.
What the desk is arguing
The desk believes the ECB's strategy to hold rates steady will ultimately help stabilize the euro, potentially pushing back against its recent low-volatility performance. Per the full note from ing, the market's expectations for a rate hike in September could support the euro, suggesting a defensive stance against further declines in EUR/USD.
Supporting this view are the broader macroeconomic conditions, where recent hawkish pivots from global central banks, including a surprisingly robust jobs report from Australia, have boosted high-yielding currencies. The commentary stresses that while broad FX volatility remains low, fluctuations in energy prices could signal risks if market sentiment shifts dramatically.
Where it sits in our coverage
Currently, consensus for EUR/USD stands at 1.1700, with forecasts ranging from 1.1200 to 1.2000 by March 2026. Specific targets include: - goldman: Mar26 1.1800 - bofa: Mar26 1.1700 - morganstanley: Mar26 1.2000
This aligns closely with the desk's assessment but reflects a somewhat optimistic view at the upper end of market expectations. Given the current spot at 1.1434, this suggests a positive outlook for the euro against the backdrop of ECB policy.
How other firms see it
Aligned firms generally share a bullish outlook on EUR/USD, highlighting targets around the current market behavior, such as goldman and bofa. However, firms like citi, advocating a more cautious approach, foresee potential dips back to lower levels like 1.1300 as a realistic future position.
Relatedly, the trajectory of EUR/USD may also respond closely to other central bank movements, particularly those from the Federal Reserve, impacting the broader dollar sentiment. Watching the interplay between US and Eurozone monetary policies remains crucial as traders anticipate the impact on EUR/USD.
How firms align with this view
Contrary positioning
Key takeaways
- 01The ECB is expected to hold rates today, potentially signaling a hawkish stance for September.
- 02Market sentiment is bolstered by strong jobs data from Australia, favoring high-yield currencies like AUD.
- 03EUR/USD trading dynamics remain sensitive to global central bank directions, especially between the ECB and Fed.
- 04Low volatility in FX markets could be disrupted by shifts in energy prices, increasing risks for current positioning.
Market implications
Watch for EUR/USD's trajectory to respond to ECB communications today, particularly surrounding any hints of a September rate hike. Market expectations may also hinge on upcoming US economic data, influencing dollar strength against the euro.
Risks to this view
Should energy prices escalate further without any signs of stabilization, this could trigger a broader risk-off sentiment, potentially reversing the current bullish outlook on the euro against the dollar. Such a development would need to be monitored closely as it could invalidate the desk's forecast.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 0.6835 |
MUFG | Bullish | 0.7000 |
Bank of America | Bullish | 0.7000 |
Articles FX Daily: Can the ECB break the euro’s low-volatility torpor? Published 07:41 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The ECB should keep rates on hold today, but we think policymakers will focus on preserving the hawkish market pricing. We suspect the now familiar post-meeting data leak will signal a September rate hike.
That may keep EUR/USD supported from a rate perspective, delaying a break lower. In Australia, blowout jobs numbers are helping the bullish AUD case Francesco Pesole , Chris Turner and Frantisek Taborsky USD: Risks remain on the upside Broad FX volatility has stayed subdued this week. Higher oil prices are not yet delivering the deterioration in global risk sentiment needed for the dollar to fully benefit from the current backdrop, and the hawkish repricing in central bank expectations in the rest of the world is capping the pass-through from rising front-end US rates to the dollar.
As a result, FX investors continue to favour high-yielding commodity currencies. Brazil's real, South Africa's rand and the Mexican peso have been among the strongest performers this week, while Norway's krone has led within G10. That said, we remain cautious.
The low-vol regime carries material risks should risk assets reach a breaking point in their tolerance for higher energy prices. That point may be nearer than current market calm implies. In our view, the next 10 days will need to deliver some path towards a renewed ceasefire, or the dollar’s short-term upside risks could increase rapidly.
Overnight, Houthi militants attacked two Saudi ships in the Red Sea, adding a further potential source of supply disruption. Today, the European Central Bank will attract most of the headlines in the macro space, while the US calendar remains rather quiet. As we expect a hawkish vibe from Frankfurt (more below), DXY may need to wait a bit longer to find its way back to 101.50.
Francesco Pesole EUR: ECB to stay hawkish The ECB is widely expected to leave rates unchanged today, but as Carsten Brzeski explains here , a surprise hike cannot be fully ruled out. As usual, our cheat sheet lays out four possible meeting outcomes. Our baseline is a hawkish hold.
The re-escalation in the Middle East and European gas prices rising faster than oil prices should keep hawkish voices dominant in the governing council, in our view. The aim today could be – once again – to preserve market pricing (45bp by year-end) to limit the risk of inflation expectations de-anchoring. Achieving that may well require some indication that a September hike remains in play – more likely through a familiar post-meeting media leak than directly in the press conference.
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